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The U.S. stock market is rising but the risk is not small. How will the market start with interest rate cuts affect the trend of the US dollar?
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Hello everyone, today XM Foreign Exchange will bring you "[XM Foreign Exchange Decision Analysis]: US stocks are rising but the risks are not small. How will the market start with interest rate cuts affect the trend of the US dollar?" Hope it will be helpful to you! The original content is as follows:
The U.S. stock market has seen a significant increase in the past week. The Fed's first rate cut recently has ignited a rise that Wall Street strategists call short-term "honeymoon market". Driven by the dual driving of relaxed financial environment expectations and the artificial intelligence boom, U.S. stocks have strongly broken the traditional weak month curse of September.
Bubbles or prosperity? Wall Street debate is underway
Bank of America strategist Michael Hartnett threw a surprising point in his latest report: There is currently a bubble, but it may not be the moment of bursting. Through a craze on stock markets over a century of crazes, its team found that the historical bubble rose by 244% from low to peak. By this standard, the "Big Seven" has increased by 223% since its low in March 2023, suggesting that there is still room for growth.
This optimistic judgment was supported by Jeff Krumpelman, chief investment strategist at Mariner Wealth Advisors. He said: "We are in the initial stage of artificial intelligence. It is not only creating huge opportunities, but also improving overall profitability and labor market health."
He emphasized: "This is no longer the S&P 500 in your grandfather's era. The forward-looking price-to-earnings ratio of the S&P 500 index is indeed high by historical standards, but he emphasized that a simple xmspot.comparison with the past cycle cannot reflect the whole picture."
The warning in the carnival
However, the hidden dangers behind the fanaticism are gradually emerging. Krumpelman warned: "What worries me the most is the reappearance of the market carnival in 2021. This is disturbing when investors flock to the Fed's interest rate cuts, pushing the market to irrational highs."
YardeniResearch President Ed Yardeni pointed to a deeper crisis: loose monetary policy may trigger a destructive rise without addressing structural problems such as labor shortages. He believes that falling interest rates in the context of a healthy economy may lead to speculative overheating driven by FOMO (miss-phobia) rather than fundamentals, and eventually ends with a drastic pullback.
The rate cut diverges from the traditional US dollar logic. The Fed's first interest rate cut should have suppressed the US dollar, but the recent upward trend of US stocks has attracted global capital to influx of risky assets in the United States, forming an abnormal pattern of "rate cuts have not depreciated". The US dollar index fluctuated around 97.65 on Monday (September 22) in a game of capital inflows and interest rate spreads narrowing.
JohnHancock's EmilyRoland reveals the phenomenon of "selective listening" in the market: the market only hears the positive benefits of interest rate cuts, but ignores the deep concerns about the deterioration of the labor market. Now there is almost a distorted logic of "bad news is good news" - any weak data means more rate cuts.
The paradox of "bad news is good news" decouples the US dollar from economic fundamentals. Once the expectation of interest rate cuts reverses or the artificial intelligence bubble bursts, the US dollar will face severe fluctuations in both directions.
Institutional differences intensify: bulls are leaping forward, while bears are on the verge of ongoing battle
When Wells Fargo, Barclays and Deutsche Bank have raised the S&P 500 target price, and are optimistic about the three pillars of resilient profit, artificial intelligence investment cycle and policy relaxation, the voice of caution is also loud.
Citi, Fundstrat and EvercoreISI warn that overvalued valuations, weaker market breadth and rising volatility in technology stocks could make the road rough in the near future.
Bill Smead, chief investment officer of Smead Capital Management, has a sharper metaphor: "70% of the S&P 500 index is dominated by the Big S&P, and the remaining 30% are barely maintained by the Seven Knights of the Doomsday of Technology. When market concentration reaches such an extreme level, it often indicates huge risks."
The Big S&P leads the rise (70% of the S&P 500 weight) drives the expansion of US stock market value, international investors exchange US dollars to participate in the market, increasing demand for US dollars in the short term. If the bubble continues, the US dollar may strengthen unexpectedly.
In this AI-driven market, the showdown between bulls and bears has just reached its climax. While enjoying the "honeymoon market", investors may need to wear seat belts and prepare for the inevitable fluctuation.
The above content is all about "[XM Foreign Exchange Decision Analysis]: US stocks are rising but have a great risk. How will the market start with interest rate cuts affect the trend of the US dollar?", which was carefully xmspot.compiled and edited by the editor of XM Foreign Exchange. I hope it will be helpful to your trading! Thanks for the support!
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